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A bold prediction: Over the next five years, a number of companies will use Internet of Things technologies to vault past competitors and become irreplaceable to customers. I expect this especially to be the case for companies that sell high-price products and services to customers whose lives and livelihoods depend on such offerings. Think about patients on life-saving medical equipment in their homes. Or construction machinery that needs to work every day on the construction site. Digital sensors that continually report on the condition of such equipment and reduce downtime will become vital cogs in the economy.

However, I predict many more companies will come up empty-handed after investing hundreds of millions in IoT technology. The main reason won’t be that they lacked the technical skills to make the technology work. Instead, it will be that they had the wrong IoT strategy. That is, they will have used IoT technology to collect field information that didn’t greatly improve customer satisfaction. In amassing the haystacks of field information that the IoT allows businesses to collect, these firms didn’t identify the few needles they needed most.

Said another way, they managed their IoT initiatives from a technology- and data-push standpoint – not from a strategic, “here’s the information the top of the company needs the most” aspect to keep their firms competitive.

I will explain how to take the more profitable approach to IoT in my upcoming presentation at SAP’s SAPPHIRE NOW conference, May 5-7 in Orlando. I will also discuss why the IoT is a great opportunity for many companies, which was the topic of my previous blog post.

Sensors, embedded software and other technologies that companies are installing in their products are starting to throw off enormous volumes of digital data. Yet we haven’t seen anything yet; today’s data volume will be a mere trickle to tomorrow’s fire hose. By 2020, there will be 25 billion IoT “endpoints” (sensing devices and systems) in the world — 30 times the number in 2009, according to Gartner Inc. And those 25 billion devices will more than three times the number of personal computers, tablet computers and smart phones in the world then (7.3 billion).

And Gartner isn’t the only firm that is bullish on the IoT. Strategy consultancy McKinsey & Company’s in-house think-tank, the McKinsey Global Institute, predicted two years ago that the IoT would improve global productivity between $2.7 trillion and $6.2 trillion annually between now and 2025. In fact, McKinsey believes 80% to 100% of all manufacturers will be using IoT applications in 10 years.

That means companies such as General Electric, Caterpillar, Medtronic, and Boston Scientific will be collecting petabytes of data. So how can companies like these make sure they’ve identified the needles in their data and they aren’t lost in the haystacks? It requires shifting the traditional role of the CIO and the IT architect from managing technology to managing information. And that, in turn, will require IT executives to help the CEO and the rest of the top management team answer three fundamental questions:

  1. What information does the Internet of Things enable our company to collect about our business that wasn’t available before? That is, now that we can gather information about the status of our products in the field as customers are using them, exactly what information is possible to gather that we never conceived of gathering in the past?
  2. Of the field information that we can now (or soon will be able to) collect through the IoT, exactly which performance data is most critical to keeping our customers satisfied?
  3. What actions will we be able to take rapidly on the most critical customer performance data, and how would it differentiate our business against competitors? (This is where ERP systems like SAP come into play, which I discussed in my previous post.)

Let’s put the above principles in more concrete terms, literally. Consider industrial equipment giant Caterpillar Inc., whose earthmoving and other construction equipment has paved quite a few highways, dug out many mines, and pushed around megatons of dirt so buildings could be built for more than 85 years. The $55 billion company is very big on the Internet of Things – so much so that its CEO, Doug Oberhelman, talks with the press frequently about it. Caterpillar has 3 million pieces of equipment in the field. Oberhelman recently told Fortune magazine that he wants to be able to accurately anticipate when those machines will fail, so that such failures can be avoided. “What we don’t have today is all of those [machines] hooked into a system that can predict failures,” he told the magazine. Avoiding equipment failures is crucial to keeping Caterpillar equipment – not competitors’ equipment – on the job site.

That information then needs to be broken down into very specific pieces of information, all of which track the vital signs of Caterpillar equipment. Now it would be very easy to say, “Well, since we’re going to capture that information, why not this other information, and why not that information?”

But just because we can track all kinds of things about our products and services in the field doesn’t mean we should. If we do, we will soon find ourselves searching for the needle in the haystacks. And that’s not a place you want to be with the IoT. I look forward to leading a discussion on this game-changing technology trend at SAP’s SAPPHIRE NOW conference, May 5-7 and hope that you will join me there and share your comments here.